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TREASURIES-U.S. 10-year yields post biggest weekly drop in seven years

Richard Leong

* U.S. payrolls grow 164,000 in July, slower than June

* Renewed U.S.-China trade tensions keep bond yields low

* Futures suggest traders see a U.S. rate cut in September

(Updates market action, adds graphic) NEW YORK, Aug 2 (Reuters) - U.S. Treasury prices rose on Friday, with 10-year yields posting their steepest weekly drop since 2012, as fears about the escalating U.S.-China trade war offset reassuring U.S. labor market data. Financial markets fell for a second day in a row after U.S. President Donald Trump on Thursday threatened new tariffs on Chinese goods in a bid to move Beijing toward a trade deal. The turmoil has also stoked expectations that the Federal Reserve would lower rates in September and possibly December. Investors have piled into Treasuries as a safe haven, pushing benchmark 10-year yields to their lowest since Nov. 9, 2016, the day after Trump was elected. "The market is going to lead the Fed to lower rates because of trade frictions. Domestic data are not going to do it," said Robert Tipp, chief investment strategist at PGIM Fixed Income in Newark, New Jersey. Wall Street's main indexes slumped on Friday to one-month lows a day after Trump's threat to impose 10% tariffs on $300 billion worth of Chinese imports, starting Sept. 1. As stocks tumbled, investors favored low-risk Treasuries, the Japanese yen and other perceived safe assets. In late U.S. trading, benchmark 10-year Treasury notes yielded 1.859%, down 3.30 basis points from late on Thursday. The yield fell to 1.832% earlier Friday, the lowest since November 2016. For the week, 10-year yields decreased nearly 23 basis points, in the biggest fall since a near 29 basis-point drop in the week ended June 1, 2012 during the height of the European debt crisis, according to Refinitiv data. The trade war has hit manufacturers around the world. U.S. factory growth slowed in July to its weakest level in nearly three years, but the U.S. labor market has been resilient. The Labor Department said nonfarm payrolls increased by 164,000 in July, fewer than a revised 193,000 gain the previous month but in line with economists' expectations. Average hourly earnings rose 0.3%, matching the June increase and beating the 0.2% gain analysts forecast. The Fed lowered rates on Wednesday for the first time since 2008 to counter risks from trade conflicts and sluggish U.S. inflation. Interest rates futures implied traders see a 98% chance the Fed would lower rates at its Sept. 17-18 policy meeting, up from 85% late on Thursday, according to CME Group's FedWatch program. The yield curve also flattened. The inverted gap between three-month bill rates and 10-year yields grew to 20 basis points from 19 basis points. The inversion between the two maturities, which began May 23, is seen as an omen of a recession. August 2 Friday 3:37PM New York / 1937 GMT Price

US T BONDS SEP9 158-19/32 29/3210YR TNotes SEP9 128-212/256 5/32Price Current NetYield % Change

(bps)

Three-month bills 2.015 2.0586 -0.026Six-month bills 1.9675 2.0144 -0.032Two-year note 100-15/256 1.7198 -0.002Three-year note 100-50/256 1.6816 0.008Five-year note 100-94/256 1.6729 -0.003Seven-year note 100-204/256 1.7533 -0.01610-year note 104-152/256 1.8588 -0.03330-year bond 110-64/256 2.3917 -0.049YIELD CURVE Last (bps) Net

Change (bps)

10-year vs 2-year yield 13.70 -2.0030-year vs 5-year yield 71.70 -4.05

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 2.50 -1.75

spread

U.S. 3-year dollar swap -1.75 -2.50

spread

U.S. 5-year dollar swap -3.75 -1.50

spread

U.S. 10-year dollar swap -8.25 0.25

spread

U.S. 30-year dollar swap -38.25 0.00

spread

(Reporting by Richard Leong; Editing by Bernadette Baum, Dan Grebler, David Gregorio and Richard Chang)